Pressure on Telecom Italia’s Local Business Reduced Slightly; Board Mulls KKR Offer

Telecom Italia’s TIIAY service revenue increased by 3.6% organically in the fourth quarter, while EBITDA after leases declined by 1.3%, as the company’s cost base continues to face inflationary pressure. In 2023, management expects the Italian business will be back to growth, with stable revenue and EBITDA growing by low single digits. We’re not convinced by this guidance, given the hypercompetitive nature of the Italian market and management’s inaccuracy in meeting its own guidance, with several profit warnings over the last 18 months. We maintain our EUR 0.25 fair value estimate and remind investors of our Very High Morningstar Uncertainty Rating.

In Italy, mobile services revenue declined by 1.5% year over year, its slowest rate of decline in two years, with revenue declining by more than 10% in several quarters. Mobile virtual network operators have been offering aggressive discounts and promotions since the start of the year, so we expect any improvement in Telecom Italia’s mobile business to be minor. Fixed-services revenue declined by 0.8% compared with 3.7% one year ago. In Brazil, service revenue grew 20.8% in local currencies due to the acquisition of Oi’s assets.

Telecom Italia recently received a nonbinding offer from KKR to acquire its fixed-line network. Italian newspaper Corriere della Comunicazione reported that the network is worth around EUR 20 billion, plus KKR is committing to invest EUR 7 billion in it. Telecom Italia’s board will meet on Feb. 24 to discuss the deal, but we don’t expect it to get the green light given Vivendi’s (one of Telecom Italia’s main shareholders) past reluctance to sell the network for less than EUR 30 billion.